Recovering Attorneys’ Fees
Litigation and resulting attorneys’ fees are often a significant cost of doing business. There are some instances, however, when companies can recover fees from the opposing party.
June 8, 2009
When it comes to recovery of attorneys’ fees, U.S. courts follow what is known as, not surprisingly, the American rule. This means that each party to a lawsuit generally pays its own legal fees. Other countries adopt the English rule, which allows the prevailing party to recover fees from the losing party.
There are exceptions to the American rule, however, and they not only can alleviate some of the costs of litigating, but they can also provide significant leverage within the context of a lawsuit itself. Typically, courts award attorneys’ fees in two circumstances: (1) when a contract between the parties provides for an award of fees or (2) when a statute or other law authorizes a fee award. Such provisions are commonly referred to as fee-shifting provisions, because contrary to the American rule, they allow a company to shift responsibility for fees to the losing side.
For this reason, it is sometimes advisable to include a fee-shifting provision in a contract. Most often these provisions are mutual, providing that the prevailing party can recover fees. This is of course a double-edged sword, because it means that while one side may recover fees if it wins, it may have to pay the other side’s fees if it loses. Some contracts contain one-sided fee-shifting provisions, which simply state that if one party breaches the contract, the other side can recover fees in enforcing the contract. Some states do not permit these one-sided provisions, and effectively deem them to be mutual — meaning that if one party has the ability to recover fees, so does the other party.
Because attorneys’ fees are often a significant factor in litigation and sometimes dictate strategy, these provisions can often be used as leverage against the opposing party. For example, a defendant forced to defend against claims may be concerned not only with a potential judgment for damages and paying its own attorneys’ fees, but may also be concerned with the prospect of having to pay the plaintiff’s fees as well. This is often a contributing factor used to force settlements. Similarly, where a plaintiff files unwarranted claims, a defendant can use a fee-shifting provision to shift some risk of economic loss back to the plaintiff.
Statutory Fee Awards
Certain state and federal statutes often permit fee awards. Civil rights statutes — such as Title VII, which prohibits various forms of discrimination — are a common example. But even there, because these statutes are designed to prevent discrimination, and courts do not want to discourage legitimate claims, they often require a finding that the plaintiff acted in bad faith before awarding a defendant its attorneys’ fees. Consumer protection laws often have fee-shifting provisions. And many states also have laws that permit an insured to recover attorneys’ fees from its insurer if the insurer wrongfully denies coverage. But again, these statutes often require bad faith, or other misconduct on the part of the insurance company or offender to recover. They are, however, often one-sided, meaning that the plaintiff can recover fees pursuant to the statute, but the defendant cannot.
The Collateral Litigation Rule
There is yet a third, often overlooked scenario in which a litigant may recover attorneys’ fees, known as the “collateral litigation” exception. This rule allows a company to recover attorneys’ fees, even in the absence of a contract or statute, where the wrongful acts of another party force the company into litigation. For example, suppose that a person fraudulently acts as the purported agent of the company and enters into a contract on its behalf with a third-party. When the company does not perform the contract and the third-party sues, the company may later be able to recover its defense costs from the fraudulent agent, because their actions forced the company into litigation with the third-party. In this scenario, the attorneys’ fees are really viewed as part of the company’s damages as a result of the fraud, rather than a fee-shifting situation.
In any lawsuit, federal and state court rules also typically permit a court to award fees if a party files a pleading without justification, or abuses the discovery process. But these are usually means of curbing abusive litigation tactics, and not a means to recover fees beyond those incurred as a result of a party’s improper conduct.
Also keep in mind that whenever fees are awarded, they must be “reasonable.” Courts will look at a number of factors in determining whether the fees sought meet that standard. In practice, it is not uncommon, even under the best circumstances, for a court to award a prevailing party less than 100 percent of the fees sought.
It is important for CPA firms to consider including a fee-shifting provision in contracts, including for example, in a retention agreement. Moreover, at the outset of litigation, parties need to be aware of opportunities to recover fees, and also the potential additional exposure that results from such contractual or statutory provisions. Considering these factors before or as a dispute arises will allow companies to better manage the litigation process, and assess the risks and rewards thereof.